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Recent research into applications for unsecured loans in South Africa shows that while applications have soared during these tough economic times, lenders have tightened up on approving such loans.

Olico, a marketing and lead-generation agency that works closely with several banks and lenders in South Africa, conducted research at the end of last year to determine the type of person most likely to qualify for an unsecured loan, as well as the average size of loan actually being granted. Its source was its database of loan applications generated through its marketing channels.

Unsecured loans, according to Investopedia, are “loans supported only by the borrower’s creditworthiness, rather than by any type of collateral. Borrowers must generally have high credit ratings to be approved for certain unsecured loans”. Unsecured loans include student loans, personal loans and credit cards.

Gareth Mountain, executive and head of sales at Olico, says: “Banks are still strict with their selection process, and certainly do not offer loans on a whim. But it turns out that unsecured loans are far easier to come by for certain personal profiles than other.”

When applying for an unsecured loan there are usually two stages to the approval process, Mountain says.

“First comes pre-approval, which is done at the credit bureau and is based on your identity document, salary and credit score. The process then moves towards post-approval, and once you get to this, the bank application stage, considerations such as affordability and expenses are taken into account.

“Generally, the amount of money that can be borrowed through an unsecured loan ranges from R2 000 to R200 000, with the payback period stretching from six months to 84 months, depending on the size of the loan.”

Olico analysed 932 000 applications from between January and June last year. It found that:

  • The average size of loan application was R46 000. “Most people apply for far more money than they actually qualify for and that is paid out,” Mountain says.
  • Popular reasons for taking the loans included putting down a deposit on a new motor vehicle, paying for education, weddings and home improvements, through to paying for holidays and medical procedures such as plastic surgery.
  • Owning a vehicle or a house increases your chances of being approved, both in the pre-approval and post-approval stages (four times more likely). If you own a car and a home, the approval rating for an unsecured loan rises even further (seven times more likely).
  • The loan size granted differs between groups: those who own a car or home secured a loan more than a third larger than those who don’t.
  • The average size of loan paid out was R28 000 for those with assets and R18 500 for those without assets.
  • Applicants who owned a car and a home received the largest average amount (R39 500), more than double that of candidates who had neither.

Mountain says Olico’s research shows that while an unsecured loan does not require assets as collateral, having fixed assets will generally improve your chances of getting a loan, because they would reflect a better credit record.

“Not only can applicants pay for the products that they already own, but they are in good standing with the banks. It might seem obvious, but their levels of debt are well managed and therefore pass the affordability calculations that the banks implement.

“This bodes well for our banks, in that they appear to live up to the credit bureau standards and are carefully scrutinising candidates before offering them loans.

“The negative consequence of this, however, is that the majority of South Africans, who don’t meet these requirements, generally resort to loan-shark options, landing them in deeper debt,” Mountain says.

PERSONAL FINANCE